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Understand the valuation process of intellectual property

When you are selling a business, one question that will come up is the value of the company's intellectual property. This is important but it can be difficult to put a number on it that can be used in the purchasing process. You should be prepared for the process that will help someone familiar with valuation get this aspect of the business sale together.

The main reason why it is hard to valuate intellectual property is because it isn't tangible. Things like patents, trademarks and processes do have a value, but coming to that amount requires that you take a close look at a host of factors.

The economic impact of the intellectual property on the company is one of the primary things to look at. How will the company fare if the property isn't transferred in the sale? If the assets are an integral part of the company, the value will be higher than if you are dealing with property that isn't critical to the business.

Another factor that is considered is the expense to get the intellectual property to where it is today. This includes research and development costs, focus group or testing expenses and the cost to register or otherwise protect the assets.

In a way, valuating intellectual property is part fact and part guesswork. The person who has to do this job has to assume that the property is going to be useful to the business for a specific amount of time. Determining that time can be complex. If there is a patent, the expiration of the patent is considered. As you can see, you can't wait until the last minute to have the valuation done. Instead, get it done early in the sale process or before you place the business up for sale.

Source: Darden University of Virginia, "Methods of Intellectual Property Valuation," accessed April 27, 2018

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